Delta Company's long-run average and actual machine-hours for last year appear below: Fixed maintenance costs of the company's maintenance service department are budgeted at $60,000 per year. These fixed costs are incurred in order to support long-run average demand. How much of this cost should be charged to Department B at the end of the year?
A)$30,000
B)$22,500
C)$24,000
D)$18,000

Question

Delta Company's long-run average and actual machine-hours for last year appear below:  Fixed maintenance costs of the company's maintenance service department are budgeted at $60,000 per year. These fixed costs are incurred in order to support long-run average demand. How much of this cost should be charged to Department B at the end of the year?
A)$30,000 
B)$22,500 
C)$24,000 
D)$18,000

Quizplus · Accepted Answer

Department B incurred 16,000 machine-hours, which is higher than the long-run average of 15,000 machine-hours. Therefore, Department B should be charged a portion of the maintenance department's fixed costs that are incurred to support this additional usage.

The allocation rate per machine-hour can be calculated as follows:

Allocation rate = Total fixed maintenance costs / Long-run average machine-hours 
= $60,000 / 15,000 machine-hours 
= $4 per machine-hour

Thus, the amount to be charged to Department B is:

Amount to be charged = Allocation rate × Actual machine-hours used by Department B 
= $4 × 16,000 machine-hours 
= $24,000

Therefore, the correct answer is C.

Delta Company's Long-Run Average and Actual Machine-Hours for Last Year